U.S. Supreme Court to Tackle Questions Left Unanswered by Stern and Executive Benefits

by Cooley LLP

As we noted last month, the U.S. Supreme Court’s unanimous decision in Executive Benefits Insurance Agency v. Arkison, Case No. 12-1200, 573 U.S. ___ (2014), affirmed the constitutional authority of bankruptcy courts to issue proposed findings of fact and conclusions of law to federal district courts in connection with “Stern claims”.  The Executive Benefits Court stopped short of deciding whether litigants could consent to a bankruptcy court entering final judgment on Stern claims. 

On July 1, 2014, the Supreme Court agreed to answer that question by granting certiorari in Wellness Int’l Network v. Sharif.  When it hears this appeal, the Supreme Court will consider whether bankruptcy courts can enter final judgments in Stern claims against a debtor where the debtor has consented to the exercise of such judicial power by voluntarily filing for bankruptcy relief.  In the lower court decision, the Seventh Circuit held that bankruptcy courts lack such authority.

Wellness, a non-debtor litigant, seeks a ruling from the Supreme Court that the debtor consented to jurisdiction of the bankruptcy court by choosing to file its voluntary bankruptcy petition, and that this implied consent is sufficient to allow the bankruptcy court to enter a final judgment on Stern claims against the debtor.  Wellness will rely on analogous precedent to argue that the debtor consented to the jurisdiction of the bankruptcy court (a non-Article III court) to enter final judgments on all matters, including Stern claims.  For example, Wellness will rely on the Supreme Court’s holding that a litigant who chooses to file suit in a non-Article III forum cannot raise an objection to that forum’s jurisdiction to enter final judgment.  It will also rely on the Sixth Circuit’s and Supreme Court’s holdings that a debtor who files a voluntary petition in a bankruptcy court waives his Seventh Amendment right to a jury trial.

In addition to the consent issue, the Supreme Court will consider whether the determination of what constitutes property of the estate under Section 541 of the Bankruptcy Code is a Stern claim, since it would necessarily involve adjudication of state law property issues.  Wellness argues that section 541 actions to determine whether property is property of the estate are essential bankruptcy issues that are properly determined by bankruptcy courts.  The Seventh Circuit’s post-Stern ruling in this case that such determinations are state-law claims and therefore beyond the constitutional jurisdiction of bankruptcy courts conflicts with the decisions of six other circuits.  If embraced by the Supreme Court, the Seventh Circuit’s approach could dramatically limit bankruptcy courts’ authority.  In arguing against the Seventh Circuit’s decision, Wellness will rely on the long history of bankruptcy courts making 541 determinations and the practical ramifications of finding that bankruptcy courts lack constitutional authority to decide Bankruptcy Code-based claims if they involve state-law issues – i.e., a shift in the workload from bankruptcy courts to district courts, since “state-law issues permeate many, if not most, aspects of bankruptcy cases.”

Wellness’ arguments are set forth in greater detail in Wellness’ petition for certiorari, which can be found here.

The fact that it is the debtor here who is contesting the bankruptcy court’s jurisdiction makes this case very different from Stern and Executive Benefits, which both involved non-debtors that were dragged into the bankruptcy court by the debtor and subsequently objected to the bankruptcy court’s jurisdiction and power to enter final judgment.  A ruling that a debtor effectively consents to a bankruptcy court’s jurisdiction in all matters by filing a voluntary petition is the logical first step to determining if and when non-debtor parties can consent as well.

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Cooley LLP

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